Background information (for Innovation and Risks Class Project):
Our company is Abbott. We are concentrating on the drug/pharmceutical side (AbbVee). Our Innovation (process) is to eliminate the wholesaler/distributor(such as McKesson and Cardinal Health) and pharmacy (such as Walgreens) and have AbbVee sell their medications (such as Humira) to the patients directly. AbbVee will act as its own pharmacy and also negotiate with the insurance company directly (eliminating the PBMs as well) for contracting purposes to reduce cost for AbbVee as well as the consumber. (Please also do some research to see how much is saved by eliminating the wholesaler/distributor (McKesson, Cardinal Health, etc.) and pharmacies (such as Walgreen’s) in this distribution process)
Please refer to the lastest Abbott Annual Report (I believe the latest is 2011) for the financials. (Available on the internet).
My paper will be on the Discovery Driven Planning for our innovative distrubution model that I talked about in my background information section (AbbVee to dispense their medications directly to the consumer – by eliminating wholesalers/distributor and pharmacies and also directly contracting with insurance companies. (Please see guidelines on what to include in my paper by following the Discover Planning worksheet, which is at the end of this order description).
Additionally to completing the Discover Planning worksheet, I have to answer the following questions (for doing a "reverse financial"):
(Corporate Frame Requirements for Disruptive Innovation Presentation)
Please specify for Abbot Pharmaceuticals:
1) Earnings: Greater than 10% of parent company’s current EBIT
EBIT = Earnings before interest and taxes
2) Return on Sales (ROS): at least equal to ROS of parent
ROS = EBIT/Revenue
3) Return on Assets (ROA): at least 3% greater than that of parent
ROA = EBIT/Total assests
4) The parent’s capability, asset, know-how, or market presence, the innovation will leverage
The necessary financial data can generally be found in the parent company’s 10-K.
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Please use this worksheet for Discover-Driven Planning Worksheet for template for paper:
Developing a Discovery Driven Plan
Rita Gunther McGrath & Ian C. MacMillan
Discovery driven planning represents an approach to establishing plans for new ventures that quite literally constitute a plan to learn. The technique requires the interaction of five processes, working together. These processes are: 1) determining the frame (objectives) for the project; 2) establishing competitive and market benchmarks; 3) define operating specifications; 4) document assumptions; and 5) establishing a milestone planning process. This worksheet is designed to help you work through the main aspects of this process.
Approach
1. Clearly specify what your criteria would be for the success of the project at maturity. How much would it have to add to your existing business in terms of profits, profitability and return on investment? Enter this information below.
Element Target
We want: Earnings greater than 10% of parent company’s current EBIT
Profits: What increment in current profits must this business deliver? For instance, if current profits are $10,000, perhaps your project needs to add 10% to that to be considered successful, for a target incremental profit of $1,000.
Current Profits: Desired Increment?:
(Please use data from We want 10%
Annual Report)
Profitability: How profitable should this business be, relative to the profitability of your existing business? For example, if current profitability is 5%, and you seek to increase profitability by 10% with the new venture, the profitability target should be 5.5%
Current Profitability: Desired increment?
Please see annual report We want 5.5%
Return on investment: How much return on investment should this business deliver at maturity? For instance, if ROI in the established business is 8%, perhaps you would like the ROI for new businesses to be 10%.
Current ROI: Desired increment?
See Annual Report We want: Current ROI + 3%
2. Next, develop a ‘reverse’ income statement. What you want to identify is the necessary revenue required and costs allowed for the business to be considered a success.
Element Target
Profits required (from previous question)
Estimated profit margin for new venture (from previous question)
Size of revenues required (multiply out)
Allowable costs (revenues less profits)
Return on investment required
Allowable investment
3. The next step is to develop an operations specification. This will be different for every project, depending on what the elements of the business model are. Your goal is to develop a clear definition of what will be required to operate the business, in order to meet the profit and profitability targets that you have established. Think through the following questions:
(For the following questions: Please feel free to answer with your best knowledge. Thank you! )
What is the ‘unit of business’ – meaning, what is your offering, exactly?
How many must you sell to achieve your profit targets?
What will you be required to do to sell this many (for example how many salespeople making how many visits to how many customers?
And so on.
You should specify operations for the following:
• Marketing and Sales
• Production
• Distribution / market access
4. You should apply the discipline of checking key ratios in the marketplace you are competing in. First, identify those key ratios that will drive performance in the business. Next, if you can, identify how competitive organizations do on these ratios, and see whether you are being realistic in your projected assumptions. Finally, check whether the market you are targeting is sufficiently large to support the business you propose to build.
5. As you are defining the operations specification, you will notice that you will be basing your specification on a number of assumptions. You should track these down in an assumption checklist, something like the following:
Assumption Checklist
Business Element Data Source Assumption No.
6. Next, identify the milestones that the project will be moving through as it unfolds, and in what sequence. Try to keep the list to no more than 10-15 key milestones. Examples include first prototype, first customer interaction, competitive response, and so forth.
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